Essays on product quality and strategic policies in open economies

This thesis consists of three essays which contribute to the theory of product quality and strategic policies in open economies.; The first essay examines strategic R&D policy in a quality-differentiated duopolistic industry where domestic and foreign firms have access to the same technology. Under price competition the optimal policy is such that the domestic government taxes R&D if the domestic firm produces a higher quality product than its foreign rival and subsidizes R&D if the domestic firm produces a lower quality product. Under quantity competition, on the other hand, the optimal policy is such that the domestic government subsidizes R&D with different subsidy rates for different ranges of relative quality, where a higher subsidy should be implemented if the domestic firm produces a lower quality product.; The second essay demonstrates that the domestic government may have incentives to use eco-labelling strategically when domestic and foreign firms compete in an imperfectly competitive domestic market, while eco-labelling is primarily aimed at improving environmental quality. When the domestic firm obtains an eco-label and the foreign firm does not, the domestic government may have incentives to set strategically a higher or lower standard for eco-label than a standard which would be non-strategically chosen, depending on the relative size of quality-adjusted unit variable costs. The strategic effects may have the same sign regardless of the form of competition.; The third essay explores protectionist motives to impose mandatory labelling of biotechnology products when a foreign firm reduces unit production cost by using biotechnology and becomes the price leader in the market. Consumers may perceive biotechnology products as being of lower quality. Competitive firms that use conventional technology may have incentives to label their products voluntarily. When voluntary labelling is fully credible, the importing country may impose mandatory labelling mainly because part of labelling costs can be shifted to the foreign dominant firm under mandatory labelling. When voluntary labelling is not credible, on the other hand, the importing country uses mandatory labelling with other trade measures such as tariffs to shift profits from the foreign dominant firm to the domestic economy.